Cushman & Wakefield: ‘Build It and They Will Come’ Days Are Over

August 26, 2013 1
Cushman & Wakefield: ‘Build It and They Will Come’ Days Are Over

The go-go days of self-storage–2003 to 2005–were a developer’s dream. There was pent-up demand and an undersupply of facilities, and banks were quick to lend. Chris Sonne, executive managing director of the Self Storage Industry Group at Cushman & Wakefield, said that back then, “you didn’t really need a balance sheet to go get a construction loan; you just needed dirt and an architectural drawing.”

Nowadays, things are a bit more complicated. Lenders want to extend loans to developers with strong balance sheets, good track records and high-quality management.

Here are some of the highlights from a recent talk that Sonne and colleague Greg Wells gave about the self-storage industry.

New Construction
“We’re on the tail end of the hangover from our oversupply problem a couple years ago.”

Sonne said that we’ll begin to more construction of new self-storage facilities, although it’ll be at a much slower rate than in 2003-05. About 120 self-storage projects either are being renovated or are under construction, he said, and another 700 to 1,000 projects are in the pipeline.

Total New Construction

“Nearly half (of the more sophisticated operators’ tenancy) comes from online sources, so the web presence is becoming increasingly important.”

“Back in the go-go days, it was ‘build it and they will come,’ and that’s not necessarily true anymore,” Wells said.

To be successful today, self-storage operators must have effective search engine optimization (SEO) and online advertising. Online aggregators and paid search platforms are changing the game, according to the Cushman & Wakefield analysts.

The self-storage asset class is fundamentally stronger than ever. Occupancy has remained relatively stable over the past 18 years, while rental income and rentable square footage have been steadily increasing.

For the second quarter of 2013, asking rental rates, rental income and occupancy are all up from the same quarter in 2012, according to Cushman & Wakefield.

In the third quarter of 2013, rental income for the publicly traded REITs was up 2.3 percent, and rental income for the industry as a whole was up 4.1 percent, compared with their respective numbers in the third quarter of last year.

Time Series Trends598

According to the Cushman & Wakefield analysts, the multifamily sector is a big driver for self-storage, and there’s been a big boost in multifamily construction over the past year. In fact, multifamily construction permits are up 22 percent year over year, they said. To be sure, this bodes well for the self-storage industry.

Additionally, investors have purchased a lot of foreclosed homes, many of which are being converted into rental properties.

The combination of a boom in multifamily construction and only a small bump in self-storage construction–along with an increase in occupancy rates and asking rents–“really creates this interesting dynamic in our market where it allows active buyers to push those cap rates down because they can feel fairly positive they can have very aggressive rental growth moving forward,” Sonne said.

We’re seeing more self-storage facilities being sold, with 41 percent of those deals being portfolio acquisitions over the past two years, the analysts said.

Cap rates for portfolio deals continue to compress. The trailing 12-month cap rate for portfolio deals is 5.92 percent. For the second quarter of 2013, the portfolio cap rate was 6.55 percent.

There’s usually a basis point spread of 25 to 50 between portfolio deals and one-off deals, although the spread can be as high as 100.

portfolio sales
Self Storage Sales598

“Much of the pain of the recession has been worked through.”

The CMBS market has opened up, with lenders already having issued $38 billion in CMBS loans so far this year. That’s $10 billion more than in all of 2012. Sonne and Wells estimate that 40 percent to 50 percent of all self-storage loans are CMBS loans.

With so many self-storage CMBS loans maturing in the next five years, it’s possible that many operators will opt to sell their properties rather than refinance them.
CMBS Maturing Loans598

Foreign Capital
Although self-storage has historically been an American phenomenon, the analysts at Cushman & Wakefield said foreign investors’ interest has been piqued. Not many foreign-capital deals have taken place yet, but it’s only a matter of time, they said. Self-storage has become an institutional asset class, and it’s gaining global attention.

Graphics courtesy of Cushman & Wakefield; cap rate info from PricewaterhouseCoopers Real Estate Investor Survey

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